Finance
Financial Modelling- A practical view
F ew analysts understand that financial modelling nothing but workings on excel spread sheet. Partially true!
Financial modelling is of building a Model which represents real world Financial situation. This is a
mathematical model. It is designed to represent the expected performance of a business or project or
business portfolio.
Myth and truth attached with financial modeling
It is only for accounting purposes:- There are many accounting software available globally. These software
are just used to see the result. But financial modelling is developed for many purposes such as corporate
finance, asset valuation, project management etc.
It is a standard product:- Many analysts believe that financial modelling is a standard product and can be
used the same model everywhere. But this is not true. Even in the same organization different financial
modeling shall be used for different purposes such as valuation, corporate finance, estimating risk return
attached with portfolio etc.
It is very easy to develop:- Since the model is a representation of real world situation, anything expected to
happen in the real world has to be incorporated in the model to know the impact on the profitability and
wealth. Therefore assessment and forecasting of data input is very critical. Moreover, all the variable inputs
should be considered and level of impact needs to be assessed with proximity.
Small business does not need financial modeling:-financial modeling can be used even for small
businesses including start-ups. For start-ups it is helpful to build out a model to understand all the variables
needed for success. The act of building out the model will bring different expenses, revenue ideas, and cash
flow requirements to the surface.
Same model can be used every time:- NO. as the time passes, business becomes bigger i.e. the internal
variables are going to change. Also, external market dynamics will also shift. Therefore, there is need to
update the mathematical model.
www.Venture-Care.com/Magazine
December 2017
14